2/07/2001 @ 4:20PM

NEA Was Not Immune To Mistakes

Like most venture capital firms,
New Enterprise Associates
(NEA) was guilty of getting caught up in the investment frenzy, throwing cash at startups with unproven concepts, weak management teams or no real market.

And the firm is still paying for those mistakes. Most recently, it lost $5.9 million in startup Web design and hosting company The Dot.com Group, and $5 million in Open Port Technologies. Both folded in the fourth quarter of 2000, and there are still companies in the firm’s portfolio that show serious signs of trouble.

Nonetheless, NEA has a loyal following among its investors. So much so that the firm managed to close the $2.2 billion NEA 10 fund late last month in the midst of a slump in the public markets and an overall slowdown in venture investments. NEA got more than $3 billion in commitments for the fund and even turned away some interested parties who were clambering to get in.

The quick and easy fund-raising process can be credited to NEA’s longstanding relationships with more than 170 investors–the nation’s largest pensions, foundations and endowments, and wealthy individuals–all of whom enjoyed triple-digit returns from 1996 to 1999. In fact, NEA’s funds have been so popular that all of its investors have been coming back for the last four years.

This kind of success has helped land two NEA venture capitalists,
Richard Kramlich
Richard
Kramlich
and
Peter Morris
Peter
Morris
, on Forbes’ Midas List of tech’s top venture investors.

Started 22 years ago by Kramlich,
Chuck Newhall
Chuck
Newhall
and
Frank Bonsal
Frank
Bonsal
, the firm focuses 60% of its investments in communications, and the remainder in B2B infrastructure and health care companies, putting up as little as $4 million and as much as $50 million in a first round of financing.

Apart from investing in some real clunkers in the last two years, NEA remains one of the largest early-stage venture capital firms. While venture returns are at their lowest since 1998 and VCs are proceeding with extra caution, NEA is sticking to its early-stage focus despite the perception that more developed later-stage deals are less risky.

NEA says investors are reacting to short-term market conditions and a drop in the stock market, but emphasizes that the best time to invest is now, not a year and a half ago when valuations were going through the roof and investments were made blindly. Unlike other venture firms that suffered from the market collapse, NEA managed to avoid huge losses in its public portfolio companies by staying clear of dot-com retailers and focusing on communications services and optical components. But even the communications sector is not immune to the whims of the public markets.

Indeed, NEA’s investment pace has slowed down considerably. Gone are the days when Kramlich, Morris and their colleagues rushed to close deals in a week or two. Now, the competition is less fierce and everyone is taking longer to evaluate business plans. Although NEA saw 12 of its companies go public last year, including
Alliance Fiber Optic Products
and
Advanced Switching Communications
this fall, that’s nothing compared to the two or three IPOs a month it saw from June 1999 to March 2000, right before the markets took a nosedive. None of NEA’s 120 portfolio companies have entered the public markets so far this year. NEA expects ten offerings in 2001, but concedes there might not be any at all.

Regardless, NEA is focusing on what it believes are very hot sectors of communications: optical and infrastructure companies. And the firm has plenty of money to spend. It’s already on the prowl for a company offering the next petabit router.